Refactor Your Budget Categories

There are a lot of budget templates out there. Any will serve the purpose, and if you've got one that's working for you, that's a good enough reason to stick with it. If you don't have a budget, though, or if you're going to be changing your budget categories around for some other reason, I've got some thoughts on what makes a good category. (See also: 8 Tips for Improving or Starting a Budget)

My own thinking in this area dates back some 15 years, to when I was setting up spending categories in Quicken. The software came with some default categories, but I found they didn't suit me. I was reminded of this just recently, when (working on another post) I was looking through the Bureau of Labor Statistics document that lists the relative weights of various categories of spending. I was intrigued to find that their categories look a rather lot like mine.

My Categories

When I was designing the structure of my categories, the first change I had to make was to get rid of a top-level category for insurance. Instead, I put insurance expenses where they belong: auto insurance under transportation, health insurance under medical, and homeowner/renter insurance under housing.

I also eliminated a top-level category for utilities. I put the power bill under housing. (I'd put heat, water, garbage, sewer, etc. there too, but those items are included in the rent where I live right now.) I put the cell phone and internet charges in a new top-level category for communications, and put postage there as well.

In addition to putting car insurance under transportation, I made sure to put all my smaller transportation expenses there as well — not only fuel and car maintenance, but also bus tokens and bicycle maintenance. Having them all right together makes sure that I know just how much owning a car really costs compared to the alternatives. (See also: How to Cut Car Ownership Costs)

Categories Matter

Budget categories are important — they can either illuminate or obscure our spending choices. For example, does the fitness center membership go under entertainment, or under medical? You can make a case for either. Your choice is driven by your values, and by your view of how the world works. But be aware that it will influence your future behavior. (For example, suppose you decide to cut your spending and start by looking for something to trim from the entertainment budget. Is the fitness center membership there, or safely tucked away under medical?) (See also: How to Trick Yourself Into Better Credit Card Behavior)

As I said, the Bureau of Labor Statistics categories turn out to look a lot like the categories that I used. In particular, they put both insurance and utilities in almost exactly the same categories where I put them, except that they had a merged top-level category for "education and communication" which does include phone, internet, and postage — but also has tuition, text books, child care, and nursery school.

Because our categories match up so well, it was easy for me to see how my spending compared to the average consumer. That's not an important comparison — my spending is influence by my own values, so there's no particular reason that it would look especially like that of the average consumer — but for me it was an interesting comparison. For example, because we live in a cheap apartment, our housing budget is a much smaller fraction of our total budget than the average consumer's. Our spending on food, clothes, and entertainment, though, is roughly in line with the average consumer. My budget line-item for medical is hugely higher than average, because I'm about to go out and (try to) buy my own medical insurance, instead of getting it as an employee benefit.

Looking at the BLS categories would be especially useful if you're creating your first budget, in that it's going to have lots of categories that you probably wouldn't think of. Many of those categories will come in at zero and should just be left out. (We don't have a line item for "renting and repairing medical equipment" or for "moving, storage, and freight.") But it's a useful memory-jogger to see the long list of categories and think, "Oh, yeah, we do need to budget a little something for new sheets and towels." The average urban consumer, for example, allocates 0.555% of the budget to "Club dues and fees for participant sports and group exercises." If you do yoga or aerobics or tai chi or belong to a softball league, you'll want to have the expense as an item on your budget.

As I say, if your budget is working for you, there's probably no good reason to change it. But if you're changing your categories anyway for reasons of your own (or making a new budget), you could do much worse than basing your categories on those used by the BLS.

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Michelle #1

since I usually don't "keep" a budget, just stop and examine spending every once in a while, but I think it's also worth asking, what is the value of each category to me? Is this how I want to spend my life? My partner also adds that he would prefer to break each category into "basics" and "luxuries," or perhaps counting party clothes, etc., as entertainment. (There's a nice mention in "I Don't Have a Thing to Wear" that the clothes in your closet should be in proportion to the time you spend on various activities.)

I hope you write a column or two on your search for private insurance. I was "lucky" enough to only pay $2000 a year for student insurance when I was quoted $700-800/month for private insurance (after years of being spoiled by $10/month premiums), but my sister's employer will no longer be offering that benefit as of July 1st, so she has been on the hunt.

Aside from the real monthly budgets, I find that a theoretical budget for understanding what happens if you lose your job or switch to a lower-paying job is very informative for long-term planning. Mine has two columns of amounts for every item. The first column is Required (to avoid mutiny) and the second column is If income allows. They can differ because of extra expenses associated with more income or less time (e.g., more gasoline and prepared foods) or extra consumption enabled by the higher income (e.g., cable TV and NetFlix).

Each is totalled in both net and required pre-tax income, making it easy to see what would need to be pulled from savings (job loss) or what must be earned (change of job). Some may wonder if is worth earning more to cover the additional consumption or expenses.

Two different versions of much the same idea. I do the same thing, although I think of it as having a contingency plan. The format is just some notes about how much could be cut from which specific budget items, in case of necessity. Back when I was working a regular job, I kept a separate "bare-bones budget" that was my fall-back plan in case of something like job loss. It was against that budget that I figured my emergency fund--I wanted enough cash on hand to support that budget (not my regular budget) for 6 months.

Having some sort of scheme along these lines is important. It would be as foolish to budget assuming that nothing would ever go wrong as it would be to budget just for a crisis situation.

Oh, and yes: A budget is an excellent place to calculate whether the increase in standard of living is worth it when considering sending an additional person into the workforce, taking a second job, or changing to a higher-paying job.

Thank you Thank you Thank you! As someone who sat down today to create her first ever budget (in my 40's - ouch) your BLS template reference has proved invaluable, if not somewhat shocking, in highlighting all the various items to include. Your advice on categories has made the task so much easier and more manageable than I anticipated, resulting in a far more detailed and realistic budget than I would otherwise have drawn up.

I am excited about this next step on my journey - so far have built an emergency fund, stopped using my credit cards (largely), consolidated my debt and accelerated the repayments. Now I am preparing to monitor my spending, adjust according to budget and set goals for financial freedom.

I am a firm believer in the power of a written monthly budget. The categories you use aren't as important as just doing the budget before each month begins, but anything that makes a budget make sense for more people gets my support.

Having a definite budget plan do eliminates unwanted expenditures and made sense of a very tight budget deliverance. Keeping your budget on a track is very essential in order to maintain a very stable financial flow. But of course it doesn't merely lies on the plan but more on the execution of this plan to a better budget management that is solely bounded by your plan.